Rental growth or counter-cyclical, opportunities abound for investors

DESPITE high vacancies and tenant incentives, Perth’s office market presents investors with counter-cyclical opportunities. Sydney and Melbourne will continue to enjoy strong rental growth, with effective rents tipped to rise by up to 12%, according to the Australian Property Institute-Opteon Office Market Outlook.

Opteon chief operating officer Ana Marinkovic said the rental growth through Sydney and Melbourne would be largely driven by short stock supply.

“Short supply in Melbourne and Sydney will see rental growth benefits for landlords. In Melbourne, effective rents could rise by as much as 12% and that is significant growth, across prime grade assets, while Sydney’s average net face rents are forecast to grow about 7% across all grades in 2018,”

Marinkovic said the picture was not quite as rosy in Perth and Brisbane, but there are some opportunities.

“The mining states of Western Australia and Queensland are down – Perth and Brisbane’s office markets have seen a retraction after the mining boom, and now the market is essentially oversupplied, meaning rents have fallen substantially,” she said.

However, the Perth market in particular would continue to present counter-cyclical opportunities for investors, despite high vacancies and high tenant incentives required, adversely impacting net rent.

Marinkovic said Perth vacancy would remain above 20% for some time, yet buyers are taking advantage of property being available at value levels that are unlikely to be repeated.

“This scenario of reduced or zero new supply going forward through new construction is the opportunity for future growth that countercyclical buyers are taking advantage of.

“Whilst not of benefit to investors, soft market cycles do provide opportunities for tenants to lease superior quality space at the same or better rentals than lower grade space.

Incentives appear to have stabilised in the range of 40% to 50% net, and office landlords through WA and Queensland’s will continue to offer high incentives to attract tenants into the vacant CBD lots and close-to-CBD lots,” she added.

According to the outlook, it is anticipated that rentals will remain stable at these low levels in the short-term.

“As rental rates have fallen, there has been a narrowing rental spread between Perth CBD and suburban markets which has resulted in suburban tenants absorbing space in the CBD to take advantage of this increased affordability,” Marinkovic said.

Brisbane rents are expected to remain stable in the short-term. Lower grade space is expected to become more challenging, however, and negative rental growth is a likely prospect with softening face rentals and increased incentives.

Net face rent growth in Adelaide’s prime office market has dried up, and incentives have lifted to between 30% and 40% of gross face rents.

Counter-cyclical transactions elsewhere in Australia’s softer markets will continue to be influenced by offshore investors, and Marinkovic expects overseas purchasers to continue to show interest in Australia, across both residential and commercial property markets.

“Otherwise, stable interest rates make for a stable market – hence, we believe things will likely remain steady for the rest of 2018,” Marinkovic said.